North American stock markets pummelled by gloomy Fed economic warning

TORONTO — North American stock markets were pummelled midweek by the Federal Reserve chairman’s warning about a prolonged economic downturn amid growing concerns about a second wave of COVID-19 infections.

The S&P/TSX composite index closed down 377.95 points or 2.5 per cent at 14,503.21.

In New York, the Dow Jones industrial average was down 516.81 points at 23,247.97. The S&P 500 index was down 50.12 points at 2,820.00, while the Nasdaq composite was down 139.38 points at 8,863.17.

“Investors are fretting about the potential, premature reopening of the economy and the risk of a second wave of infection which would threaten an already fragile economic backdrop,” she said in a interview, noting Dr. Anthony Fauci’s Senate testimony Tuesday.

That was followed by Fed chairman Jerome Powell’s “gloomy assessment where he warned of the lasting damage to the U.S. economy also undermined recent optimism and added to that sombre tone in the markets today.”

Bangsund said markets are severely overvalued.

The recovery since the March 23 lows “has been nothing short of impressive but also unprecedented,” she said.

There’s little regard for risks and little room for disappointment resulting from the progression of the virus.

Massive monetary and fiscal stimulus will likely prevent markets from retesting the lows, but that doesn’t mean there won’t be further declines, said Bangsund.

“Our thought is that the market has run too far, too fast given the facts,” she said.

“So the fact that the market has runup over 30 per cent since those March 23 lows in the absence of a fundamental catalyst just I think warrants a little bit of caution.”

She said Powell’s comments throw the possibility of a v-shaped or quick recovery out the window.

In addition to the risk of a second wave of infections, consumer spending will likely be constrained without a viable treatment.

“I think investors have to readjust their expectations and that’s why on a day like today, yesterday as well, you’re seeing some notable weakness on those virus-related economic headlines.”

The TSX was pushed lower by a sea of red among its 11 major sectors.

Health care led the declines, dropping 5.8 per cent with Aurora Cannabis Inc. and Canopy Growth Corp. down 8.7 and 7.9 per cent respectively.

It was followed closely by energy, which lost 5.6 per cent as a drop in crude oil and natural gas prices hurt Frontera Energy Corp., which decreased nearly 15 per cent.

The July crude contract was down 65 cents at US$25.68 per barrel and the June natural gas contract was down 10.4 cents at nearly US$1.62 per mmBTU.

In addition, several large oil producers were hurt by the decision from Norges Bank Investment Management, which manages Norway’s sovereign wealth fund, to stop investing in them after concluding they produce unacceptable levels of greenhouse gas emissions.

Crude oil prices initially got a lift after U.S. crude stockpiles declined for the first time since January.

The Canadian dollar traded for 71.06 cents US compared with an average of 71.35 cents US on Tuesday.